Gov. Phil Murphy’s $45 billion budget outlined last month calls for fully funding the public worker pension fund for the first time since 1996. Should he convince lawmakers to sign off on that measure, the governor would ultimately fulfill a key campaign promise.
The unfunded pension system was the source of 11 credit downgrades during the tenure of Murphy’s predecessor, Republican Gov. Chris Christie. Under Murphy, S&P Global downgraded New Jersey this past November, citing the addition of $4 billion in borrowing to cover pandemic costs on top of the state’s unfunded pension obligations.
The spending plan calls for $6.4 billion in payments to the pension system, the full amount actuarially recommended for the state. Under the current budget, the state is making $4.7 billion in pension payments, and Murphy’s first enacted budget in 2018 called for $3.2 billion of pension payments through June 30, 2019.
Top lawmakers like Senate President Stephen Sweeney, D-3rd District, have proposed major cuts to the public worker pension system. Sweeney’s “Path to Progress” includes ideas such as the implementation of a 401k-style retirement plan for newer public employees, or a combination of a defined pension system and a 401k plan.
Sweeney has maintained that such proposals could take decades to yield savings, but that they would strengthen the state’s financial picture in the long run.
While those plans have been met with resistance from the governor, Murphy, Sweeney and Assembly Speaker Craig Coughlin, D-19th District, came to an agreement last year with the state’s largest teacher’s union – the New Jersey Education Association – on health care reforms that they say would save teachers and the school districts hundreds of millions of dollars each year.
Financial analysts have warned that mounting pension costs, nonetheless, could still crowd out spending on other state priorities. S&P cautioned last year that the state could be forced to cut expenses elsewhere in future budgets in order to pay for the pension costs.
At the same time, investments for the pension fund soared in the second half of 2020, marking a rare bright spot for an economy and state budget pummeled by the COVID-19 recession for the past 11 months.
Figures released by the State Investment Council in January showed that the pension fund reaped 14.8% of investment returns during the second half of 2020, double the forecast 7.3% rate of return for the system.
The pension fund closed the year with $83.3 billion in assets, according to preliminary data presented by Division of Investment Director Corey Amon. During the second half of the 2020 fiscal year, which ran Jan. 1 to June 30, the pension fund saw just a 1.2% rate of return and its assets were valued at just $76.7 billion. The first half of the 2021 fiscal year, during which investment income surged, ran from July 1 to Dec. 31.
Amon, during the virtually held council meeting, described that time period as a “challenging global, economic and investment environment.”
“It’s been a really remarkable roller coaster ride over the past year and we’re certainly grateful for the types of returns the cap markets have provided and helped strengthen the financial position of the pension fund along the way,” he told the SIC.
Over the course of the 2020 calendar year – Jan. 1 to Dec. 31 – the fund saw a 10.75% rate of return, according to a report from the Division of Investment.
“The pension fund was not immune to the adverse impact that the COVID-19 pandemic had on the global economy and on investment returns,” he added. “Fiscal year returns were impacted by certain private market investments, which are inherently longer-term strategies. Investments in real estate and certain private credit strategies, for example, were meaningful detractors to overall returns.”